Determining Your Business’ Value
One of the most important aspects of the sales process is valuing your business. Without an accurate valuation of your business, you cannot determine an asking price or properly sell your business. An inaccurate valuation of your business can have devastating consequences, causing you to over- or underprice your company and thus making a successful sale less likely. Given these stakes, properly valuing your company is clearly a vital aspect of the sales process.
However, business valuations are somewhat subjective. Countless industry experts and professional brokers have written books detailing various business valuation methods. Each method can come to a slightly different conclusion about your business’s value, and the same can be said even when different brokers utilize the same method. This is why it is important to remember that business valuations are an estimate of your company’s market value .
Ultimately, your business’s true value can only be determined by the market and how much a buyer is willing to offer.
Valuing Your Business with the Cash Flow Method
A company’s value can be estimated through various methods. At the Mobile, Alabama, office of Morgan & Westfield, we use the cash flow method.
The cash flow method is one of the most accurate and effective methods for valuing a business. This valuation method appraises your company’s value through the lens of your company’s true profitability. Meaning, this method considers not just your actual profits but also the discretionary expenses that will normally decrease your profits.
Specifically, this method considers factors like depreciation , interest expense , owner’s salary, as well as any other discretionary expenses. Including all of these factors and valuing your business by its actual cash flow, rather than just its profits, enables us to more accurately estimate your business’s market value.
Ultimately, buyers are purchasing a business for its cash flow, which is why buyers find this valuation method to be acceptable.
Discretionary expenses can vary based on the choices that you make as an owner. By including these expenses into your business’s cash flow analysis, we are able to more precisely estimate the true cash flow of your business. This is then combined with specific multipliers to determine your business’s optimum selling price.
Once we have an approximation of your business’s optimum selling price, we are able to recommend a pricing range so that you can choose an asking price.
The cash flow method of business valuations focuses exclusively on your company’s cash flow. This method does not consider your business’s assets because they have limited value. Your business’s cash flow, on the other hand, is more dynamic and continuous. For as long as the business is running, there will be cash flows that continuously impact the company’s value to ownership.
This is not the case with assets, as financially capitalizing on an asset can only happen once. And as assets depreciate, their value will only go down, eventually reaching a point where they no longer have any impact on your company’s value.
So rather than considering assets, the cash flow method simply takes the cash flow that our advisors calculate for your business and multiplies that by multiplier factors that account for some of your business’s specific qualities. Some of these factors may include:
- If you have recently released or will soon be releasing a new product line.
- If your business has a diverse customer base (one type of customer does not make up over 10% of your overall customer base).
- Your position in your local market relative to your competition.
- Your overall market share.
- The ease with which market share can be gained and your customer base can be increased.
- The ease with which your location and leased property can be retained by your buyer.
- The overall condition of your business both tangible and intangible.
- The risk of key personnel leaving as a result of the sale, and the ease with which a new owner will be able to fulfill your role in the business’s daily operations.
Each of these factors has a multiplier factor attached to it, and how your company performs based on these factors will determine how each of these factors impacts your company’s value. For example, a competitive company with new products and a growing customer base will have its cash flow multiplied by all of these factors, and the company’s estimated value will then increase. However, if a company is losing market share and relies on a small customer base, then the company’s value will decrease when these factors are applied to the cash flow.
Given the complexity of business valuations and the high stakes involved in making an accurate valuation, having your business appraised by a professional is always the best move. To learn more about how our team can determine your business’s value, contact the Mobile, Alabama office of Morgan & Westfield on 888-693-7834.
Business Advisors of Southern Alabama
At the Mobile, Alabama, office of Morgan & Westfield, our team of professional business advisors is dedicated to helping the business owners of our local communities as they navigate the sales process. We are particularly dedicated to working with the business owners of Southern Alabama and Southern Mississippi, including business owners in the communities of:
- Alabama: Mobile, Theodore, Tillmans Corner, Alabama Point, Bayou La Batre, Union Church, Prichard, Chickasaw, Saraland, Satsuma, Wilmer, Mauvilla, Georgetown, Gulfcrest, Creola, Axis, Bucks, Movico, Mount Vernon, Citronelle, Calvert, Malcom, Tensaw, Stockton, Hurricane, Blakeley, Spanish Fort, Daphne, Malbis, Fairhope, Barnwell, Foley, Elberta, Summerdale, Robertsdale, Loxley, Rosinton, Stapleton, Pine Grove, Dyas, Gateswood and Bay Minette.
- Mississippi: Vernal, Crossroads, Lucedale, Agricola, Big Point, Escatawpa, Moss Point, Gauthier and Pascagoula.
Each year, our business advisors facilitate hundreds of sales within these communities and the neighboring communities that makes up Alabama’s Mobile County, Baldwin County and Washington County, as well as Mississippi’s Jackson County, George County and Greene County.
Our considerable experience throughout this area qualifies our business advisors to facilitate the sale of any business in the Southern Alabama and Southern Mississippi region.
If you are a business owner in this area and are considering selling your business, contact us now to learn more about how we can help you in selling your business.